Nine Things We Learned on Tuesday About the Next Fed Chairman

Jerome Powell, a former lawyer, investment banker, and Treasury official, looks like Central Casting’s idea of a banker.

Photograph by Andrew Harrer / Bloomberg via Getty

With Washington largely focussed on other issues—major tax legislation;
Donald Trump versus “Chuck and Nancy”; sexual-harassment charges—Jerome
Powell, the White House’s nominee to replace Janet Yellen as chair of
the Federal Reserve, testified for more than two hours before the Senate
Banking Committee on Tuesday morning. The hearing didn’t create many
headlines. But the role that Powell is about to take on is a vitally
important one, and he’s largely unknown outside the Fed, where he has
served as a member of the board of governors since 2012. So, what did we
learn about him from the hearing? Nine points stood out:

1. He’s a cool customer. A former lawyer, investment banker, and
Treasury official, Powell looks like Central Casting’s idea of a
banker—sixty-four years old, with a lined forehead and carefully combed
gray hair. (Some observers suspect that Trump picked him because he
looked the part.) “You are about to become the most important
economic policymaker in the world,” Senator Dean Heller, the Republican
from Nevada, said to him. “How do you feel about that?” Powell paused for
just a second before responding, “I feel fine about it, Senator.”

2. He’s keen to avoid being seen as a Trump stooge. In his opening
statement, Powell said he would do everything he could to preserve the
Fed’s “independent and nonpartisan status.” He also said that nothing in
his conversations with “anyone in the Administration”—which presumably
included Trump—had given him reason to be concerned about pressure from
the White House. And when Senator John Neely Kennedy, a Louisiana Republican,
asked him what role Steven Mnuchin, Trump’s Treasury Secretary, would
play in his decision-making, Powell replied, “He would have no role.”

3. Powell is also staying carefully away from partisan land mines. Throughout the hearing, senators from both parties pressed
Powell for his views on the Republican tax bill. Smoothly evasive, he
repeatedly said that fiscal policy wasn’t in the Fed’s “lane.” At one
point he told Senator Bob Menendez, a New Jersey Democrat, that the Fed
doesn’t even have “a model of the effects of these cuts,” which wasn’t
strictly accurate. (The Fed’s macroeconomic model of the U.S. economy
can be used to gauge the impact of tax cuts.) Heller asked him if he had
a personal position on the tax bill. “No, Senator, I don’t,” Powell
said.

4. He seems like a fiscal moderate. Although Powell wouldn’t be
drawn into judging the Republican tax plan, he did express some concerns
about rising public debts. “Like all of us, I’m concerned about the
sustainability of our fiscal path in the long run,” he told Menendez.
“I’m very concerned about that.” Senator Chris Van Hollen, a Maryland
Democrat, even managed to lead Powell to comment on some specific
numbers from the Republican tax plan. “If there was another $1.5
trillion debt, it would make a bad situation worse, would it not?” Van
Hollen said. To which Powell replied, “It would, all else equal.”

5. He seems certain to follow Yellen’s lead, which means that the Fed’s current policy of slowly raising interest rates will continue. In his opening statement, Powell said that he would “strive, along with my colleagues, to support the economy’s continued progress toward full
recovery. Our aim is to sustain a strong jobs market with inflation
moving gradually up toward our target.” The citing of jobs before
inflation echoed Yellen’s emphasis, although it was also consistent with
the Fed’s dual legal mandate of insuring price stability and maximum
employment. Powell never suggested that he considered rising inflation
to be an immediate threat, and he defended the policy approach that has
kept the federal funds rate, which the Fed controls, at or below 1.25
per cent since the end of 2008. “We’ve been patient in removing
accommodation, and I think that patience has served us well,” he said.

6. The biggest difference between Yellen and Powell’s approaches might be their respective attitudes toward financial regulation. In his
testimony, Powell defended the over-all approach that was adopted after
the great financial crisis of 2008–09, which involved forcing banks to
hold more capital and liquidity, to take regular stress tests, and to
construct “living wills” that would supposedly enable them to be wound
down, rather than bailed out, in the next crisis. But Powell also said
that the Fed should take a “fresh look” at some of the rules and see if
any of them were too costly or burdensome. It doesn’t help anyone for
banks to spend more money than they need to on safety and soundness, he
told Senator Brian Schatz, a Hawaii Democrat. “Too much paper, too much
compliance?” Schatz asked. “Yes, you hear that a lot,” Powell replied.
“There’s certainly a lot of regulatory burden.”

7. He could well approve a weakening of the Volcker Rule, which was designed to prevent the trading departments of big banks from speculating on their own accounts—an activity known as proprietary trading. During a slightly testy exchange with Senator Elizabeth Warren, the
Democrat from Massachusetts, Powell said, straight out, “I do
support a rewrite of the Volcker Rule.” Warren asked whether that meant
he approved of more proprietary trading. Powell didn’t answer directly.
Instead, he said he was in favor of “tailoring the application” of the
rule. This was the sort of language that Wall Street wanted to hear.
Ever since Paul Volcker, a former Fed chairman, issued his
proposal, at the start of 2010, the big banks have vigorously opposed
it. Although Powell also said that he wanted to stick to the spirit of
the rule, the bankers will be delighted to have someone at the Fed who
is sensitive to their concerns.

8. He thinks “Too Big to Fail” is a thing of the past. While most
financial experts believe that big banks are safer than they used to be,
and that the introduction of “living wills” and other measures has made
the prospect of closing one down if it got into trouble less daunting,
rarely do you hear anyone of Powell’s standing say that a potential bank
failure could no longer threaten the system and require a taxpayer
bailout. When asked by Kennedy, the Republican senator from
Louisiana, if “we still have banks that are too big to fail in America,” Powell said, “I would say no to that.”

9. He doesn’t fully understand rising inequality. In response to a
question from Senator Sherrod Brown, the Ohio Democrat, Powell said that
inequality and wage stagnation are pressing problems, and he said that,
to him, the “most compelling” factor in explaining them was a shortfall
in educational attainment that had left American workers without the
skills they need to compete in a high-tech world. Broadly speaking, this
is the thesis that Claudia Goldin and Larry Katz, two Harvard
economists, presented in their 2010 book, “The Race Between Education and Technology.” It is a widely cited theory, and it may well help
explain the gap between the wages of skilled and unskilled workers. But
it doesn’t really address the explosion in inequality at the top of the
income distribution, much of which emanates from rising compensation in
the financial sector—where Powell spent much of his career—or the slow
growth in wages earned by recent college graduates. When Powell said
that the Fed doesn’t have many tools for dealing with the issue of
income distribution, he was stating received wisdom. But the Fed does play an important role in determining the level of employment, the regulatory environment, and the level of asset prices, all of which affect inequality. The Fed isn't entirely an innocent bystander.